Follow KW

How Rising Interest Rates Will Impact Affordability

In a recent Forbes blog post, multimillionaire hedge fund manager John Paulson declared that today’s record-low interest rates made this the best time to buy homes in fifty years. “If you don’t own a home, buy one,” Paulson said. “If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.”  Why should we care what Paulson thinks? Well, he was among the few to accurately predict the subprime collapse and, while no one has a crystal ball, a closer look at the numbers supports his call to action.

Historically low interest rates are the key…and they aren’t likely to hang around for long.

As we wrote in SHIFT, buyers who “choose to wait until prices come down more” are gambling that interest rates will hold steady or drop. The truth is even a 10 percent drop in home prices is nullified by a 1 percent increase in interest rates. The figure below illustrates how this works for a $250,000 home purchase and the relative likelihood of each scenario.

To figure out which was a smarter bet–counting on home prices to fall further or interest rates to rise–our research department took the last ten years of monthly home price and mortgage interest rate data and ran the numbers to see which was more likely: an increase in mortgage rates or a further drop in home prices. Here’s what we found:

  1. A one percent increase in mortgage rates is ten times more likely to happen than a ten percent drop in home prices.
  2. A one percent rate increase more than offsets a ten percent reduction in home prices.
  3. When interest rates fall by one percent, the total interest paid is almost three times more than the interest savings from a ten percent drop in home prices.
  4. The probability of both happening at the same time is ridiculously small, and homeowners would still pay 15 percent more in interest over the life of the loan.

Interest rates have dominated the news in recent months as we’ve shattered record low after record low. Potential home buyers need to understand the positive financial impact low interest rates have on the cost of home ownership and the thousands of dollars that can be saved over the life of a typical mortgage loan. For those who can afford to buy, trade up, or invest, our current market presents a lifetime opportunity.

Posted in Uncategorized
 
14 comments on “How Rising Interest Rates Will Impact Affordability
  1. Jay Papasan, VP of Publishing and Executive Editor says:

    Realtors, how would you convey this critical information to your buyers? Share your script or, even better, share a YouTube video of you delivering it!

  2. This is a must to share with your buyer clients. They may tell you they are going to wait until after the holidays or give some other reason, but if you show them these facts, you will get buyers off the fence!

  3. mykwalker1 says:

    Great post Jay! Last week I did a similar video post that focused on what amount a buyer could purchase with the same monthly payment if the rates went up just a point or two. I put a little “pain” in. It by showing that the same payment would eliminate a bed/bath if the rates went up just slightly.

    The video can be seen here: http://www.youtube.com/techtipstuesday

    Thanks again!

    Michael Walker
    Keller Williams Realty – Greater Rochester

  4. Jay Papasan, VP of Publishing and Executive Editor says:

    Great video, Michael. I like how you flipped it and focused on purchasing power instead of cost or savings. I also like that you included a down payment, which is bit more pragmatic than my example. Good work. Thanks for sharing.

    Jay Papasan

    http://www.Twitter.com/JayPapasan

    http://www.Facebook.com/JayPapasan

  5. pwkibby says:

    I could not have said it better. That said, I will be sharing this with all the “Buyers & Shoppers” that have toured my Open Houses lately. And tomorrow too. THANKS.

  6. kwmt says:

    Fantastic – sharing on our facebook wall!

    Keller Williams MT Realty – Bozeman
    http://www.kwmontana.com

  7. rmills7 says:

    If you have a client sitting on the fence, this is a must read article. Always remember the house price may go down a little but you live with the interest rate for 15-30 years!

  8. johnexo says:

    Rising interest rates is definitely going to minimize the chances of buying a home. As this article say’s, its a lifetime opportunity to make an investment in real estate.

  9. gblatt says:

    Jay, great article. I shared similar information with a seller the other night. With just a one-half percent increase in interest rates, buyers will need a 6% increase in income to afford a home at the same price they qualify for with today’s rates. Conversely, a seller would need to reduce their price to maintain the same number of buyers in the buyer pool that could buy their home. Rates DO affect affordability and marketability…depending on which side of the transaction you are on.

  10. patrickpdk says:

    The flaw in this logic is that housing prices decline as interest rates raise. This is natural and necessary since interest rates impact the entire market.

    The buyers pain of rising interest rates only comes in the resistance of sellers to lower their prices.

  11. Great post Jay! I would like to re-post this on my Las Cruces Real Estate Blog. So glad I joined Keller Williams Realty! We will be sharing this information with out clients buying and selling homes in Las Cruces!

  12. tinahecht says:

    Thanks for putting this so simply and so we can share it easily with our clients.

    http://www.homesjohnscreek.com/

  13. firsttimehomebuyer says:

    Doesn’t really matter how low rates go if Banks won’t lend. They are so scarred to make a “bad loan” that they can’t even make the simple loans. The extra amount of paper work is rediculous. Even FHA loans and VA Loans are hard to get.

    Start lending
    http://www.fhainfo.com
    http://www.vainfo.net

  14. It’s NOT about interest rates–it’s all about “appreciation”! We in the “Wine Country” of Sonoma County, California have seen the median home increase 44% IN THE PAST 3 YEARS! Rates for an FHA loan are now in the sub 4% range. Our median income has NOT rebounded from the great recession so our affordability–due to increase home prices, is leaving MORE families behind.

46 Pings/Trackbacks for "How Rising Interest Rates Will Impact Affordability"
  1. [...] How Rising Interest Rates Will Impact Affordability. … other posts by cecilia [...]

  2. [...] 5 Responses to “How Rising Interest Rates Will Impact Affordability” Feed for this Entry Trackback Address [...]

  3. [...] How Rising Interest Rates Will Impact Affordability. [...]

  4. [...] How Rising Interest Rates Will Impact Affordability. [...]

  5. [...] How Rising Interest Rates Will Impact Affordability. Published in: [...]

  6. [...] How Rising Interest Rates Will Impact Affordability is a post from the Keller Williams blog.  Interest rates will not stay low forever, it is amazing  how a rate can really affect the opportunity for investment. [...]

  7. [...] Check out this article from blog.kw.com How Rising Interest Rates Will Impact Affordability [...]

  8. [...] How Rising Interest Rates Will Impact Affordability Filed Under: Blog, Keller Williams [...]

  9. [...] How Rising Interest Rates Will Impact Affordability. [...]

  10. [...] How Rising Interest Rates Will Impact Affordability. This entry was posted in Uncategorized. Bookmark the permalink. ← REALTOR® Magazine-Daily News-Home Sales Could Enter ‘Virtuous Cycle’ [...]

  11. [...] price and low interest rates or a lower purchase price and higher interest rates? Read “How Rising Interest Rates Will Impact Affordability“, written by Jay Papasan, KW’s VP of Publishing and Executive Editor, to see if you are [...]

  12. [...] How Rising Interest Rates Will Impact Affordability Published by Jay Papasan, VP of Publishing and Executive Editor on November 11, 2010 [...]

  13. [...] How Rising Interest Rates Will Impact Affordability. « Orangeburg ‘repair’ alternative – Community News LikeBe the first to like this post. [...]

  14. [...] for home prices to continue to fall or for mortage interest rates to begin to rise.  According to Jay Papasan, VP of Publishing and Executive Editor at Keller Williams International, a one percent increase in mortgage rates is 10 times more likely to occur than a ten percent drop [...]

  15. [...] How Rising Interest Rates Will Impact Affordability. [...]

  16. [...] How Rising Interest Rates Will Impact Affordability. var a2a_config = a2a_config || {}; a2a_config.linkname="How Rising Interest Rates Will Impact Affordability"; a2a_config.linkurl="http://www.amycearnal.com/93/how-rising-interest-rates-will-impact-affordability/"; a2a_config.show_title=1; Posted in Uncategorized [...]

  17. [...] This post was mentioned on Twitter by Randy Elgin, Ellen & Doc Stephens. Ellen & Doc Stephens said: Thanks to @JayPapasan for sharing this: How+Rising+Interest+Rates+Will+Impact+Affordability http://t.co/o4AELOk via @AddThis [...]

  18. [...] How Rising Interest Rates Will Impact Affordability. [...]

  19. [...] just read a great blog post on the Keller Wiliams Blog about how rising interest rates will affect home buying affordability. Jay Papasan writes that just [...]

  20. [...] This post was mentioned on Twitter by Christine Smith, Shaun Reilly. Shaun Reilly said: How+Rising+Interest+Rates+Will+Impact+Affordability http://t.co/wwHmoT6 via @AddThis #mortgages #realestate [...]

  21. [...] How Rising Interest Rates Will Impact Affordability. [...]

  22. [...] In a recent Forbes blog post, multimillionaire hedge fund manager John Paulson declared that today’s record-low interest rates made this the best time to buy homes in fifty years. “If you don’t own a home, buy one,” Paulson said. “If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.”  …read more [...]

  23. [...] It seems these days like all people can talk about are homes prices.  “Have we hit bottom?”….”How fast will they rebound?”…”If I wait a year to sell, will I make more money?”.  Most often, what we find lost in the shuffle is any serious consideration of our still amazingly low mortgage interest rates.  For many home buyers (and those wishing to sell and ‘move up’) the current interest rates need to be a major consideration in their decision-making process.  Check out this graphic from the Keller Williams blog post, ‘How Rising Interest Rates Will Affect Affordability‘. [...]

  24. [...] How Rising Interest Rates Will Impact Affordability. [...]

  25. [...] Finding the Best Interest Rates for Poor Credit Car LoansWealth Secret — Took out at the Best Interest Rates in order to Leverage Large Yield InvestmentsMortgage Interest Rates Plunge Below 4 PercentSan Mateo’s Home Mortgage Interest RatesMortgage Interest Rates DipFannie Mae Mortgage Interest Rates & Costs RisingMortgage interest rates hit 60 year lowGet The Best Car Loan Interest Rates – Helpful Tips Home Prices, Interest Rates, and my Question to Maria Bartiromo: The Week in HousingHow Rising Interest Rates Will Impact Affordability at [...]

  26. [...] How Rising Interest Rates Will Impact Affordability Published by Jay Papasan, VP of Publishing and Executive Editor [...]

  27. [...] Posted by Mark Olesh in Words Of Wisdom For those who can afford to buy, trade up, or invest, our current market presents a lifetime opportunity. Reposted from KWblog. [...]

  28. [...] How Rising Interest Rates Will Impact Affordability at Page Description: [...]

  29. [...] Rate EnvironmentVietnam One-Year Bonds Fall as Banks Boost Lending; Dong Gains – BusinessweekHow Rising Interest Rates Will Impact Affordability at #header { background: [...]

  30. [...] You can choose to do it manually or automatically, and there are numerous platforms apart from blogs. Source URL: http://blog.kw.com/2010/11/11/how-rising-interest-rates-will-impact-affordability/ [...]

  31. [...] Affiliate Marketing And Home Business Many of us dream of being our own bosses. The lure of big money and flexible work hours is quite attractive. However, many are afraid to venture out on their own. They fear that they do not have the capital required to get a business started or they don’t want to loose the security of their day job. The solution could be starting a home business. The truth of the matter is that you can start your home business with no money at all. Ask yourself this, do you have a spare room or space in your house. Do you have a computer with an internet connection? Do you have a phone line? If you have these three things you have the essentials of an office from which your home business can be made. Affiliate marketing can be a great way for you to get started in your home business. Affiliate marketing will provide you with the opportunity to sell either a product or a service. With low capital and little space you may want to concentrate on services. Once you have made the decision, you need to evaluate your skills. Source: http://blog.kw.com/2010/11/11/how-rising-interest-rates-will-impact-affordability/ [...]

  32. [...] Simple marketplace where people can buy, sell and swap items or services. Source: http://blog.kw.com/2010/11/11/how-rising-interest-rates-will-impact-affordability/ [...]

  33. [...] in to consideration current interest rates, your loan qualification and the current market.  Affordability in the US and in Austin, TX has never been lower.  Here is an easy [...]

  34. new launch says:

    new launch…

    “[...]Keller Williams Realty | triparishrealestate.com[...]“…

  35. http://Www.hindusocialmedia.com...

    Keller Williams Realty | triparishrealestate.com…

  36. irish companions – Limerick…

    Keller Williams Realty | triparishrealestate.com…

  37. http://www.youtube.com...

    “[...]Jay Papasan | triparishrealestate.com[...]“…

  38. Anonymous says:

    bodybuilding.com promo code 2013…

    It shouldn’t be complicated….

  39. petworth real estate, real estate petworth…

    “[...]Keller Williams Realty | triparishrealestate.com[...]“…

  40. Anonymous says:

    going here quick quid…

    Recovering from a payday here, and it too acquitted itself good in our bombardment tests….

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Archives
Search by Category
Advertisement
Ad
Tweets from Keller Williams Realty